2022 has been a challenging year for block managers and lessees. Coming out of the pandemic, after a year of being ‘confined to quarters’, and a surge in DIY projects during 2020 and 2021, on hold plans to move home or refurbish were again crushed by the perfect storm of surging inflation, wage stagnation/real income reduction, interest rate rises and construction cost increases which have not been seen since the 1980s and 1990s.
The decade of low-cost borrowing is officially over.
In 2021 the UK government introduced a ‘Stamp Duty Holiday’ to boost the economy in the face of the Covid pandemic. The net result was a surge of property transactions with June 2021 at the height seeing 200,000 property sales alone. This led to sustained increases in property prices which, coupled with a lack of supply, actually made it harder for first time buyers to get on the property ladder and more expensive for people to move.
Interest rate rises by the Bank of England to combat surging double digit inflation have impacted on mortgages with consumers increasingly seeking long-term fixed rate deals, and this is in a year with a considerable amount of refinancing following the end of two-year mortgage deals signed in 2020. Mortgage rates are far higher than in preceding years, making many mortgages unaffordable and forcing some to consider selling up and moving into rental accommodation.
The war in Ukraine has impacted upon food and energy security, with record rises in energy costs and food costs being seen across the UK and indeed Europe further fuelling rampant inflation.
The drive to carbon net zero to combat climate change has faltered somewhat due to construction cost increases and slow roll-out of sustainable and affordable alternative technologies. Despite restricted retrofit contractor availability and insufficient government subsidies, net zero remains prominent in the minds of homeowners (including leaseholders) who want to change to sustainable energy sources, lessen their carbon footprint and reduce their energy bills.
Volatility in governance has been a further destabilising factor in recent times, with changes and U-turns in key policies following the exit of Boris Johnson. A reversal of the 300,000 homes/year target, political infighting, a disastrous weakening of the pound, a ‘run’ on gilts, then a Bank of England intervention, has together exacerbated the cost of mortgages and the general affordability of everyday essentials.
The new Chancellor was set to announce his budget when this issue of NOTB was going to print. His medium-term fiscal plan is anticipated to increase taxes across the board, further dampening the spending ability of the average consumer in a move towards austerity measures as the government seeks to ‘balance the books’ and lift the UK economy out of recession in 2023/2024.
Looking ahead to 2023 – Construction
Inflation
According to the Office of National Statistics (ONS), inflation reached 11.1% in October 2022, the highest level seen in the UK since 1981. This is widely expected to remain high until the middle of 2023. The knock-on effects to the construction industry will be seen in tender price index increases over the coming year.
Interest Rates & Mortgages
The Bank of England will be forced before and during 2023 to increase interest rates until inflation is brought down to its target of 2%. Commentators speculate that the base rate could climb as high as 6%. The real term effect of such a rise in interest rates is to increase the rates on mortgages adding further pressure to the ability of households to make ends meet as monthly mortgage repayments increase. This will inevitably result in a reduction in the number of new refurbishment and construction projects undertaken in 2023. Indeed, the ONS published data for Q2 2022 is showing a decrease of 10% of new project starts vs Q1. We expect this trend to continue.
Construction Costs – Getting it right
During the past couple of years, we have seen an extraordinary mix of events that have contributed to sustained volatility in the construction industry and in turn sustained uncertainty for those undertaking development and construction work; this is set to continue into 2023 and possibly 2024.
Post-Brexit uncertainty contributed to higher costs and uncertainty around importing materials, exacerbated by the haulage driver shortage, foreign worker exodus, and shipping crisis. Record oil prices contributed to higher costs to operate plant and machinery, and to manufacture and ship goods. DIY projects which gained in popularity during the coronavirus lockdowns, contributed to higher material costs and general material shortages, and continually increasing inflation contributed to an increased labour cost.
There remains a gap between wage growth and inflation and the potential risk of disruptive industrial and protest action persists, not limited to the construction industry. The coronavirus pandemic saw productivity levels plummet, with many workers furloughed or made redundant and as we see demand picking up again, there remains an underlying, prolonged general shortage of skilled labour.
All of these factors have combined to create sustained inflationary pressure on tender returns as contractors attempt to navigate and pass on the various uncertainties and cost risks to clients.
In our tender returns, we are seeing an unwillingness to fix prices for longer than a few weeks. We are also seeing an increased demand for advance payments in order to secure prices from suppliers which continue to be volatile in many trades, and a clear preference for the 'design and build' procurement route has emerged which is no surprise as it gives contractors greater control over their supply chains.
The last year or so since Covid has recorded strong resilient construction output with demand remaining consistently high, albeit with indications of a reduction commencing. Materials’ prices have stabilised somewhat since the lockdown periods which give greater cost certainty when cost estimating, but remain volatile in some areas, especially when influenced by external factors.
EK Cost Management works both client side and contractor side. Pricing tenders when working with contractors gives us an ability that many PQS (professional quantity surveyor) firms will not have – the ability to collect, collate and use raw, first-hand data in the moment. Our access to contractor supply chains allows us to keep a ‘finger on the pulse’ of the market and understand the mood and key underlying issues.
With interest rates set to rise to as much as 6% in 2023, there will be real pressure on the ability of homeowners (leaseholders) through to institutional developers/funders to start or fund (viable) projects as they focus instead on simply paying their mortgages and the affordability of debt.
Combined with the aforementioned issues, a growing energy crisis and its knock-on effects to the construction and manufacturing industries in the UK, as well as anticipated labour disputes, and the Ukraine crisis, we expect to see a difficult year ahead for the industry as new project starts reduce, viability margins reduce and prices continue to increase.
We pride ourselves on our ability to estimate, forecast and deliver to relevant and realistic budgets, based on real data from our projects. This is especially valuable to our clients during these unprecedented volatile market conditions where the cost of finance needs to be optimised to match the proposed reliable construction costs. A reliable QS can make the difference between a viable cost-efficient scheme and a scheme that costs significantly more than it should.
Philip Thomas MRICS, Director, EK Cost Management
